Bill submitted to Congress to regulate coverage of "clawback" claims for bank employees

I need to start off with a confession: my name is Bill and I’m an insurance lawyer. (“Welcome, Bill”). I’m going to be writing about insurance as it applies to employment-related disputes. Even though you may think insurance is a very dry subject, I promise to make it as interesting as I can – although there will be no dancing green lizards in any of these posts. And, if you work for (or defend) a company that can face suits by employees, you may find these posts to be interesting food for thought when it comes to protecting your corporate bottom line from those suits. (As always, though, whether an individual dispute is insured or not is a very fact-specific inquiry that depends on the language of the policy and the facts at issue – your mileage may vary, as they say).

Many of the other folks who write on this blog are able to tell great tales of high-profile fights between executives and their companies. Those are important stories and they are at the core of what this blog is about. My perspective on employment disputes is somewhat different: I look at whether a company’s insurance policies can provide the company with a defense against an action brought by an employee (or reimbursement for fees and costs when a company defends itself), and whether those policies will cover a judgment or settlement of the case. It can be a little esoteric at times, and I spend a lot of time thinking about the meaning of individual words in an insurance policy.

Over time, I’ll put posts here detailing the different types of insurance policies that may (or may not) apply to disputes between employers and employees. Today, though, a post from the headlines: Congressman Barney Frank (D-Massachusetts) has submitted a bill titled the “Executive Compensation Clawback Full Enforcement Act.” The bill would “prohibit individuals from insuring against possible losses from having to repay illegally-received compensation or from having to pay civil penalties.” It wouldn’t apply to every employee, but only to those who are officers, directors, or employees of banks and “non-bank holding companies.”

There is a lot to unpack in that, but essentially it means this: if an employee of a bank is found guilty of some sort of white collar crime or civil action – either committed against her company, shareholders, or some other entity – and part of the judgment is to repay her salary or bonus because that money is found to be proceeds of the bad act, her insurer won’t be able to cover that repayment.

This is interesting to me as an insurance lawyer – and should interest bank employees and financial institutions – for several reasons. First, many insurance policies that cover employees already purport to exclude payments like this. Those policies, at least in the view of the insurers that write them, exclude reimbursement or “disgorgement” from the definition of covered “damages” that they contain. The policies usually do this by excluding claims “based upon a personal profit or advantage to which the insured was not legally entitled” and claims for “damages uninsurable by law.” On that note – damages “uninsurable by law” – many states hold that reimbursement of profits or salaries gained as a result of illegal conduct are excluded by the decisions of their state courts. See, for example, J.P Morgan Securities, Inc. v. Vigilant Ins. Co., N.Y. App. Div. 1st Dept., Index 600979/09, Dec. 13, 2011. As insurance law is generally a matter of state law, though, not every state has clearly held this position.

And that brings me to the second interesting thing about Congressman Frank’s bill. Insurance has traditionally been a matter left to the states to regulate – at least since the McCarran-Ferguson Act of the 1945. It’s curious that this bill would change that principle on this one key aspect of insurance. I suspect many state insurance regulators will be opposed to this bill on that principle, because it marks an increasing Federal intrusion into a traditional state function.

Given the current lack of general appetite in Congress for substantive action on many fronts –especially those that affect banks and bank employees – in my view, the bill is not very likely to advance far this year. There’s also the small matter of a pending election in five months, which may slow its progress even further.